Adverse Selection in Insurance Markets: Policyholder Evidence from the U.K. Annuity Market

TLDR

The study tests for adverse selection in the UK annuity market using a unique dataset of annuities. The authors analyze this dataset to assess how annuity characteristics relate to ex post mortality. The analysis finds systematic links between ex post mortality and annuity features—such as payment timing and estate payment options—consistent with asymmetric information, but no mortality differences by annuity size, suggesting selection may exist on some contract dimensions but not others and highlighting the need to examine detailed contract features when testing asymmetric information models.

Abstract

We use a unique data set of annuities in the United Kingdom to test for adverse selection. We find systematic relationships between ex post mortality and annuity characteristics, such as the timing of payments and the possibility of payments to the annuitant's estate. These patterns are consistent with the presence of asymmetric information. However, we find no evidence of substantive mortality differences by annuity size. These results suggest that the absence of selection on one contract dimension does not preclude its presence on others. This highlights the importance of considering detailed features of insurance contracts when testing theoretical models of asymmetric information.